Stocks Support Sequester

Judging from the stock market, Republicans should keep doing exactly what they’re doing when it comes to the sequester. Well, almost exactly: it would be better if they didn’t implicitly buy into any of the Obama administration’s sky-is-falling rhetoric by calling, in near-panicked tones, for meetings with the president or for the Senate to do something.

But still, based on people putting their money where their brains are, what’s happening now is basically fine, which is more than enough for a Republican Party that has been routinely outmaneuvered by this president and that often shows less confidence than a 40-year-old virgin visiting the Chicken Ranch.

In the 11 months since the failure of the Simpson-Bowles Commission in March, 2012, the S&P 500 index is up approximately 7%. More interesting, over that same time period, the defense and aerospace industry (as represented by the Exchange Traded Fund, PPA, which holds many of these names) — those companies which the administration is putting forward as likely to suffer pestilence, famine, and huge job losses — is up the same percentage as the broader market.

One might wonder why the market has done so well over recent months, rallying into the election and quickly making up the post-election sell-off. In my view, there are two reasons:

First, as I’ve argued on these pages previously, American businessmen and women are the cockroaches of economics: it takes a nearly unimaginable obstacle, much more economic poison than even this administration has delivered so far, to kill their entrepreneurial spirit. Just as water finds a way around a boulder that falls into a river, American capitalists find a way to navigate the foul river of over-regulation and over-taxation created mostly by Democrats and too often tolerated by Republicans.

Second, just as the first substantial improvement in the recent recession’s unemployment data came the month after Republicans won control of the House of Representatives in the 2010 election, Republicans are standing on principle, even if not as firmly as we’d like, despite being demonized by Obama and his media lackeys as “obstructionists.” They are the only impediment keeping near-lethal doses of Democratic venom from being injected into our economy. Whether you are looking for a job, or whether you own stocks in your retirement account, you should be grateful every time the GOP finds enough backbone to stand up to the most anti-business president in our nation’s history.

While I hope not to have the opportunity to test this theory, I suspect that if Democrats took back control of the House in 2014, the stock market would suffer a severe sell-off and along with it the economic opportunities of many Americans.

To be sure, markets can be wrong. They are, after all, the dominion of human beings (despite breathless news reports about the impact of computerized trading) and are the result not only of sober analysis but also of emotion, trend-following, speculation, and even the occasional fraud. But over reasonably long periods of time, the market remains one of the best forecasting and discounting mechanisms we have.

Despite the various aspects of the human character that can cause pricing errors, the fact that transactions are made voluntarily by people risking their own money or with an incentive to do well with other people’s money tends to mean that (other than during true bubble markets when greed completely dominates fear) a “wisdom of crowds” effect dominates stock prices.

During the course of months of hand-wringing about the over-hyped impact of the small reduction in the rate of growth of government spending known as the sequester, investors’ improved fortunes have been largely due to Republicans stopping Barack Obama from replacing it with tax hikes and promises of never-to-happen cuts. Apparently, Republicans have seen that movie so many times now that even they remember it.

The big money in the stock market is run by pension funds, hedge funds, university endowments, and other institutions whose leaders tend to read the Wall Street Journal more than the New York Times and therefore understand what’s going on in the world, and the financial implications of current events, better than the average voter or Democratic member of Congress does.

For those who aren’t financial market professionals, you might be surprised to know that the total value of the U.S. stock market is a little more than half the value of the U.S. bond market, and the value of global stocks is only one third the value of global bonds. In the past, I would have argued that the bond market is an even better macroeconomic forecaster than the stock market. But with Ben Bernanke running the single largest, most dangerous market manipulation in the history of mankind — buying a stunning and frightening 90 percent of newly issued U.S. Treasury debt — it is very difficult to put much stock, if you’ll pardon the pun, in today’s bond market.

No doubt some of Ben’s funny money is also making its way into stocks. But still, stock markets are much closer to a true, free, competitive market than today’s government bond market is.

So my advice to John Boehner, to Republicans who act as if they really think sequestration is a problem: relax, watch the market (without putting too much emphasis on any one day), and know that while the sequester isn’t great policy, it is a real victory to have even a modest reduction in the growth of government spending under this president.

The harder part, especially for a messaging-challenged GOP, is to explain to the wider electorate what stock prices are already saying: that things are not as bad as they feel, but that they would indeed be that bad and worse if Republicans were not keeping Barack Obama and Harry Reid from injecting greater doses of anti-free enterprise poison into the slowly-recovering body politic.